Main things to avoid or look out for when investing
Member since 2020 · 56 posts · 38 votes
Im a newbie investor no deals under my belt still just learning. I want to start off my journey in investing rentals .What are some major DO-NOTS when it comes to real estate in detail and examples would be great as well.
Negative cash flow, too high of a down payment,...and negative cash flow...and did I mention too high of a down payment?
@Joe Villeneuve so the actual cost is what you pay out of pocket and the total cost factors in the principle and interest and the utilities that are in the tenants name?
Correct. This is important because you don't start making a profit until you recover all of your actual cost (as in cash) in cash. So if you put down a higher DP thinking you are getting a higher CF, you would be correct on the surface, but actually losing money since the higher CF is generally minimal compared to the higher DP you are paying out of pocket. This means it will take you longer to recover your actual cost too.
Keep in mind the DP is "buying" you equity. This cost of equity isn't a gain...it's just a bank transfer of your cash from liquid (usable) form from the bank, to dead form in equity. The face value is the same in both places. Equity increases that you pay for, just increase your cost, and lose you money since you have to recover it in cash before you start making a profit. Equity increases from principal paydown from rent money is paid by the tenant as is free to you...as are the equity increases gained from appreciation.
Why do you say you don't make a profit until you recover your actual investment? You may not REALIZE a profit until you sell or monetize a profit until you pull out the cash but that doesn't mean you don't make a profit until you recover your investment through cash flow or a liquidity event.
I looked through this thread and I have to ask, what does this mean?
"1 - Stock Market Analysis uses percentages to analyze. When you use percentages to analyze REI you lose...because those percentages lie. A return of 15%/year in the SM is not even close to a 5% return/year in REI...if both investors start with the same amount of cash, and reinvest all the returns back in. 5% here is greater, by far than 15%."
I think you are conflating the returns from leverage with unlevered returns. Yes you can put less money down and recover your investment quicker, grow quicker, recycle your cash, etc. but you are taking on more risk due to the leverage you are employing, it's not a free lunch.
No on all points, but I will address the last one here. If you put 100k on one property or 100k on 5 properties, you are risking 100k in all cases. If you put it all on one property, you risk it all if that property fails you. If you put it on 5 properties, then each property only has 20% of your cash at risk. When you are spreading out your cash you are also spreading out your risk. Yes, you have 5 potential risk locations...but that's a good thing, not a bad thing since all 5 would need to fail you to equal the loss at risk if you put all your cash here in one property.
What's at risk is your cash. Just ask the bank.
You put 100k into 500k of value and the price drops 10% you lose 50k genius. If you put 100k into 1 property and it loses 10% you lose 10k. There are benefits of diversification so lets abstract away from "1" vs "5" for a minute, how about 10 vs 50, or 100 vs 500? You are diversified either way, the only difference is the leverage employed.
100k>>>500k value...down 10% = 450k value.
100>>>>100k value...down 10% = 90k value.
Last time I checked, 450k was still much higher than 90k...(genius?)
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
@Joe Villeneuve
My overall thought is that the purchase price is the only thing that matters. Your “cashflow vs down payment model” to me, is a terrible strategy. My example;
Little Yellow House
Purchase: 127k
Fix up: 25k
Down Payment: Cash
Rent 1475-1800
I let this house be paid off in cash for a couple of years until I needed the money for another investment. I could have BRRR'd it after the seasoning period and taken the money (Value around 350k) but I didn't have a need at the time for the money.
My point is that if I would have just been into it for the least amount, or refinanced it when I didn’t need the money, or any other dogma that is pushed. It would have not made as much sense.
Getting a good deal is what matters.
I can't follow this because there are so many parts missing. I'll mention just a few:
1 - If you think my comments are "cash flow vs. Down Payment", then you don't understand what I'm saying...at all.
2 - When I give examples my numbers are specific to an actual property...not some arbitrary "Little Yellow House"
3 - Again, specific numbers...not "Rent 1475 - 1800"...and the rent isn't what the analysis is based on. It's based on the CF...which you make no mention of at all.
4 - In your previous criticism, you say I left out a number of things, and yet you mention rent...but no monthly expenses. Why?
5 - How many years is "...a couple of years..." payoff?
There's a huge difference between total cost and actual cost...which I don't think you are grasping.
You're right when you say, "Getting a good deal is what matters". What are you basing your "good deal" on though? I know what I'm basing mine on...profit.
I guess I will go at it line by line
1 - If you think my comments are "cash flow vs. Down Payment", then you don't understand what I'm saying...at all.
Your whole argument that a large downpayment hurts you is silly at best. Everyone knows that assets are always repositioned. The idea that a downpayment effects a "deal" is very shortsighted.
2 - When I give examples my numbers are specific to an actual property...not some arbitrary "Little Yellow House"
It is a little yellow house, I own it. I have for 6 or 7 years. I don't really feel like looking up the date and I don't post addresses of deals I have done.
3 - Again, specific numbers...not "Rent 1475 - 1800"...and the rent isn't what the analysis is based on. It's based on the CF...which you make no mention of at all.
I started at 1475, it rents now for 1800. I make a small amount on the property each month. I don't consider monthly income to be a huge reason why I buy property. You really miss all the other large "cashflows" if you are focused on monthly. The Monthly keeps your head above water.
4 - In your previous criticism, you say I left out a number of things, and yet you mention rent...but no monthly expenses. Why?
I just don't like to put it all out there. I am a private guy.
5 - How many years is "...a couple of years..." payoff?
It has debt on it now. My point was, when I first bought the property in cash, I waited to do a refinance. I collected the rent, 1475 at the time, and waited until the right time to pull out money. You might consider that "dead equity" but I also was not paying interest on it and having the money sit in my bank account.
There's a huge difference between total cost and actual cost...which I don't think you are grasping.
If on a refinance I get out about 100k more than I put in, who really cares?
My point is this, down payment does not matter. If you are dealing with a liquid'ish asset (conforming SFR), you buy a great deal, and you plan on growing, you will reposition (sell, refi, ect.) that asset before you pay yourself back off monthly CF. If you limit your down payment, or pay in cash, it really does not matter.
@Joe Villeneuve
My overall thought is that the purchase price is the only thing that matters. Your “cashflow vs down payment model” to me, is a terrible strategy. My example;
Little Yellow House
Purchase: 127k
Fix up: 25k
Down Payment: Cash
Rent 1475-1800
I let this house be paid off in cash for a couple of years until I needed the money for another investment. I could have BRRR'd it after the seasoning period and taken the money (Value around 350k) but I didn't have a need at the time for the money.
My point is that if I would have just been into it for the least amount, or refinanced it when I didn’t need the money, or any other dogma that is pushed. It would have not made as much sense.
Getting a good deal is what matters.
I can't follow this because there are so many parts missing. I'll mention just a few:
1 - If you think my comments are "cash flow vs. Down Payment", then you don't understand what I'm saying...at all.
2 - When I give examples my numbers are specific to an actual property...not some arbitrary "Little Yellow House"
3 - Again, specific numbers...not "Rent 1475 - 1800"...and the rent isn't what the analysis is based on. It's based on the CF...which you make no mention of at all.
4 - In your previous criticism, you say I left out a number of things, and yet you mention rent...but no monthly expenses. Why?
5 - How many years is "...a couple of years..." payoff?
There's a huge difference between total cost and actual cost...which I don't think you are grasping.
You're right when you say, "Getting a good deal is what matters". What are you basing your "good deal" on though? I know what I'm basing mine on...profit.
I guess I will go at it line by line
1 - If you think my comments are "cash flow vs. Down Payment", then you don't understand what I'm saying...at all.
Your whole argument that a large downpayment hurts you is silly at best. Everyone knows that assets are always repositioned. The idea that a downpayment effects a "deal" is very shortsighted.
2 - When I give examples my numbers are specific to an actual property...not some arbitrary "Little Yellow House"
It is a little yellow house, I own it. I have for 6 or 7 years. I don't really feel like looking up the date and I don't post addresses of deals I have done.
3 - Again, specific numbers...not "Rent 1475 - 1800"...and the rent isn't what the analysis is based on. It's based on the CF...which you make no mention of at all.
I started at 1475, it rents now for 1800. I make a small amount on the property each month. I don't consider monthly income to be a huge reason why I buy property. You really miss all the other large "cashflows" if you are focused on monthly. The Monthly keeps your head above water.
4 - In your previous criticism, you say I left out a number of things, and yet you mention rent...but no monthly expenses. Why?
I just don't like to put it all out there. I am a private guy.
5 - How many years is "...a couple of years..." payoff?
It has debt on it now. My point was, when I first bought the property in cash, I waited to do a refinance. I collected the rent, 1475 at the time, and waited until the right time to pull out money. You might consider that "dead equity" but I also was not paying interest on it and having the money sit in my bank account.
There's a huge difference between total cost and actual cost...which I don't think you are grasping.
If on a refinance I get out about 100k more than I put in, who really cares?
My point is this, down payment does not matter. If you are dealing with a liquid'ish asset (conforming SFR), you buy a great deal, and you plan on growing, you will reposition (sell, refi, ect.) that asset before you pay yourself back off monthly CF. If you limit your down payment, or pay in cash, it really does not matter.
OK. Line by line:
1 - "Shortsighted"? You're kidding right? This just proves you haven't the foggiest what I'm saying. The reason why the lower DP is so important is the exact opposite. It's the most longsighted part of this discussion. If you put 100k on one property that was worth 100km you would have a property worth 100k. If you put that same property on 5 properties, each gets a 20k DP, that gives you assets worth 500k. This is at the start. That means if these properties appreciated 5% in the first year (choose any % you want), then the all cash option would increase to 105k in value, but the 500k option would increase to 525k in value...and thanks to basic math, each year after that, if they all increase at the same rate, the original "shortsighted" option would increase in dollars faster and faster (exponentially) than the all cash option. How is this shortsighted? This is the complete opposite of that.
2 - Your description sounded like one out of the air. My apologies for misunderstanding, nut I always use real properties for my examples as well...for the same reasons as you.
3 - What other "large cash flows" are you talking about?
4 - I put all the important numbers "out there" to validate my final numbers. I never, and will never, add a location either. That doesn't mean those numbers can't be included so the reader can see how the end number is arrived at.
5 - This is where the math comes in.
Your Option:
Cash in Deal = 150k
PV = 350k
CF = 1500/yr (you said it was small) x 7 years = 11k (rounded up)
7 yr appreciation (2%/yr) PV = 394k
7 year return if held = 11k - 150k = (139k) loss...you can't count the equity yet because it isn't realized, but if you did, = 255
7 year total return in cash if sold= 394k + 11k - 150k = 255k
My Option: I wouldn't buy these houses unless it CF at least 7k/yr per property, so that's what I'll use, but I'll also only assume the AP = PV
Cash in Deal = 150k (I'm starting with the same cash you are) = 20% DP but on 5 properties worth 150k each
PV = 750k
CF = 7k x 7yrs x 5 properties= 245k
7 yr appreciation (2%/yr) PV = 862k
7 yr total return in cash if held = 245 - 150 = 95k...you can't count the equity yet because it isn't realized, but if you did, = 417k
7 yr total return in cash if sold = 826 + 245 - 540 (remaining loan bal) = 531k
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
@Joe Villeneuve
How did you miss the detail that I took out 250k from a 150k investment. Where did that come into your Calc.? Although it’s all out there another format might help
Series of Cashflows
-150k purchase price and Reno
-1200/month net (taxes and ins. Deducted) for 2 years, 28,800 over that term
-250k refinance (I would consider this a large cashflow)
How does that work into your Calc? Did you miss that the other 2 times?
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
@Joe Villeneuve
How did you miss the detail that I took out 250k from a 150k investment. Where did that come into your Calc.? Although it’s all out there another format might help
Series of Cashflows
-150k purchase price and Reno
-1200/month net (taxes and ins. Deducted) for 2 years, 28,800 over that term
-250k refinance (I would consider this a large cashflow)
How does that work into your Calc? Did you miss that the other 2 times?
When you refi, is that a loan...and do you have to pay it back? So it's not income.
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
Numbers don't lie
I was curious on how my one house compares to your multiples. I plugged it in on excel and did a 5 year IRR. You might have to do some research on what constitutes a cashflow, from a financial perspective. It is pretty funny how my single deal has a higher rate of return than 7.5 of your deals. You have also depleted out your cash in the process.
Assumptions:
700/mo income over 7.5 properties
I plugged in your numbers and this is what we come up with on an IRR
Your 7.5 houses:
| -150000 | Down Payment |
| 63000 | Year 1 |
| 63000 | Year 2 |
| 63000 | Year 3 |
| 63000 | Year 4 |
| 63000 | Year 5 |
| 31% | IRR |
My Single House:
| -150000 | Down Payment |
| 14400 | Year 1 |
| 264400 | Year 2 |
| 4800 | Year 3 |
| 4800 | Year 4 |
| 4800 | Year 5 |
| 40% | IRR |
Where are you accounting for the debt from the REFI in year 2?
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
Numbers don't lie
I don't know what this comment is referencing but that is correct, which is exactly my point.
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
Numbers don't lie
I don't know what this comment is referencing but that is correct, which is exactly my point.
If you have a property that cash flows positive, the only cost to you is the cash that comes out of your pocket. If you pay 100% in cash for a 100k property, your cost is 100k. If you pay 20% DP on that same property, your cost is only 20k..and the rest is paid for by the tenant. The tenant is paying the interest and the loan balance.
If both REI start with the same 100k:
1 - the person buying at 100% (100k) buys 1 property worth 100k.
2 - the person buying at 20% DP can buy 5 properties...each = 100k so the total PV is 500k.
3 - if the CF from the 100k property is 10k because there is no debt, then it takes 10 years to start making a profit
4 - if the CF from the 20k property is 5k due to 5k in mortgage payments/yr, it takes 4 years to start making a profit...for each property
5 - so, the person paying 20k per property gets 5 properties, 25k in CF, 500k in PV, and they both have the same equity (100k) at the start.
6 - if all the properties appreciate the same, the person with the 5 properties gets 5 times the appreciation.
7 - the person with 5 properties can buy the 6th property after year one from the CF using the same strategy
8 - the person paying 100k has to wait 10 years to get their 2nd property.
9 - if the person buying properties at 20k a pop buys a new property with every 20k gained in CF, by year 10, the 100k buyer isn't even in the same stratosphere for CF, PV and equity.
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
Numbers don't lie
I don't know what this comment is referencing but that is correct, which is exactly my point.
If you have a property that cash flows positive, the only cost to you is the cash that comes out of your pocket. If you pay 100% in cash for a 100k property, your cost is 100k. If you pay 20% DP on that same property, your cost is only 20k..and the rest is paid for by the tenant. The tenant is paying the interest and the loan balance.
If both REI start with the same 100k:
1 - the person buying at 100% (100k) buys 1 property worth 100k.
2 - the person buying at 20% DP can buy 5 properties...each = 100k so the total PV is 500k.
3 - if the CF from the 100k property is 10k because there is no debt, then it takes 10 years to start making a profit
4 - if the CF from the 20k property is 5k due to 5k in mortgage payments/yr, it takes 4 years to start making a profit...for each property
5 - so, the person paying 20k per property gets 5 properties, 25k in CF, 500k in PV, and they both have the same equity (100k) at the start.
6 - if all the properties appreciate the same, the person with the 5 properties gets 5 times the appreciation.
7 - the person with 5 properties can buy the 6th property after year one from the CF using the same strategy
8 - the person paying 100k has to wait 10 years to get their 2nd property.
9 - if the person buying properties at 20k a pop buys a new property with every 20k gained in CF, by year 10, the 100k buyer isn't even in the same stratosphere for CF, PV and equity.
Okay I'll go piece by piece -
@Joe Villeneuve is that a cashflow calculation or something else? Never heard of debt servicing being included in a cashflow Calc. Wasn’t your whole point that putting down too much is a bad thing. I am getting paid to buy houses and it’s also a bad thing. Which side of your mouth should I believe because you are talking out of both of them?
Like I said, you don’t understand the basic principle of cashflows so trying to explain it to someone who does not want to understand is a challenge.
You have to work 10x harder than I do to make the same return. I would say I feel pretty happy with how to leverage property.
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
Numbers don't lie
I don't know what this comment is referencing but that is correct, which is exactly my point.
If you have a property that cash flows positive, the only cost to you is the cash that comes out of your pocket. If you pay 100% in cash for a 100k property, your cost is 100k. If you pay 20% DP on that same property, your cost is only 20k..and the rest is paid for by the tenant. The tenant is paying the interest and the loan balance.
If both REI start with the same 100k:
1 - the person buying at 100% (100k) buys 1 property worth 100k.
2 - the person buying at 20% DP can buy 5 properties...each = 100k so the total PV is 500k.
3 - if the CF from the 100k property is 10k because there is no debt, then it takes 10 years to start making a profit
4 - if the CF from the 20k property is 5k due to 5k in mortgage payments/yr, it takes 4 years to start making a profit...for each property
5 - so, the person paying 20k per property gets 5 properties, 25k in CF, 500k in PV, and they both have the same equity (100k) at the start.
6 - if all the properties appreciate the same, the person with the 5 properties gets 5 times the appreciation.
7 - the person with 5 properties can buy the 6th property after year one from the CF using the same strategy
8 - the person paying 100k has to wait 10 years to get their 2nd property.
9 - if the person buying properties at 20k a pop buys a new property with every 20k gained in CF, by year 10, the 100k buyer isn't even in the same stratosphere for CF, PV and equity.
Okay I'll go piece by piece -
"An investment isn't a cost..."? What? So you get into investments for free? Of course an investment has a cost to it. It's called the "cost of the investment".
More equity = more risk because the equity is what is at risk. Just ask any lender.
3 - Appreciation isn't profit until you can access it. It's profit in theory, but until it becomes real, it's just theory. I say this because you don't lose cash flow once you are paid it, but you can lose equity within the hour after you calculate it in. Besides, when you go to sell the property (access it), what happens if you can't sell it for the needed amount? Equity is a number that to realize it you depend on future events you have no control over. It's not profit until it's realized.
4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?
6 - See #4 above. Same answer.
8 - ...and by the time the persons refinances, the person that invested using leverage from the start has already been making their profits...exponentially.
9 - once again, see #4 above.
Debt service is one of the most important parts of cash flow. It's usually the largest monthly expense...and I included it when I talk about my cash flow. If you're telling me it's OK to NOT include it, then my cash flow is much higher, and my returns are off the charts.
What does the statement "Debt service is one of the most important parts of cash flow." mean to you?
What are your "off the chart" returns, based on IRR?
How would you classify my refinance? Is it a cashflow or not?
What does the statement "Debt service is one of the most important parts of cash flow." mean to you?
What are your "off the chart" returns, based on IRR?
How would you classify my refinance? Is it a cashflow or not?
Debt service is usually the biggest expense, thus one of the most important parts in the analysis. That's why my cash flow for leveraging is half of what it would have been if it wasn't leveraged.
You're not going to like this, but I don't care about IRR since most of the calculation involves virtual money and can disappear at any moment. It's a legitimate analysis tool, but I don't like it so I don't use it. I analyse cash flow, CoCReturn, recovery of my cost, and I keep equity as a separate gain...since it is a form of virtual "feel good" money.
Counting the refi in your cash flow can be rationalized as OK, but it would be very misleading since it's a one time event. It is however a net cash gain when you calculate CoC Return...if it's done in the first year.
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
Numbers don't lie
I don't know what this comment is referencing but that is correct, which is exactly my point.
If you have a property that cash flows positive, the only cost to you is the cash that comes out of your pocket. If you pay 100% in cash for a 100k property, your cost is 100k. If you pay 20% DP on that same property, your cost is only 20k..and the rest is paid for by the tenant. The tenant is paying the interest and the loan balance.
If both REI start with the same 100k:
1 - the person buying at 100% (100k) buys 1 property worth 100k.
2 - the person buying at 20% DP can buy 5 properties...each = 100k so the total PV is 500k.
3 - if the CF from the 100k property is 10k because there is no debt, then it takes 10 years to start making a profit
4 - if the CF from the 20k property is 5k due to 5k in mortgage payments/yr, it takes 4 years to start making a profit...for each property
5 - so, the person paying 20k per property gets 5 properties, 25k in CF, 500k in PV, and they both have the same equity (100k) at the start.
6 - if all the properties appreciate the same, the person with the 5 properties gets 5 times the appreciation.
7 - the person with 5 properties can buy the 6th property after year one from the CF using the same strategy
8 - the person paying 100k has to wait 10 years to get their 2nd property.
9 - if the person buying properties at 20k a pop buys a new property with every 20k gained in CF, by year 10, the 100k buyer isn't even in the same stratosphere for CF, PV and equity.
Okay I'll go piece by piece -
"An investment isn't a cost..."? What? So you get into investments for free? Of course an investment has a cost to it. It's called the "cost of the investment".
More equity = more risk because the equity is what is at risk. Just ask any lender.
3 - Appreciation isn't profit until you can access it. It's profit in theory, but until it becomes real, it's just theory. I say this because you don't lose cash flow once you are paid it, but you can lose equity within the hour after you calculate it in. Besides, when you go to sell the property (access it), what happens if you can't sell it for the needed amount? Equity is a number that to realize it you depend on future events you have no control over. It's not profit until it's realized.
4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?
6 - See #4 above. Same answer.
8 - ...and by the time the persons refinances, the person that invested using leverage from the start has already been making their profits...exponentially.
9 - once again, see #4 above.
@Joe Villeneuve It's been a pleasure sparring with you but this will be the furthest I go down this rabbit hole. I suggest you read a basic book on accounting, investing, or both. Like the real fundamentals, nothing soft - maybe a textbook or take a course at your local community college. I promise you will learn something.
Anyways - A cost is an expense that runs through income. Some examples would be insurance on your property, or taxes, or a repair bill for a plumber. An investment takes cash and converts it into something that hopefully generates cash over time, such as a real estate purchase, a stock purchase, a buy into an LP, etc.
Of course, if you are only putting up 20k it is less risky than 100K. But apples to apples is a 100k investment into 500k of MV vs 100k investment unlevered.
Appreciation you haven't accessed is called an unrealized gain. Just because it isn't realized doesn't mean it isn't real. Of course you may not know exactly what it is worth until you sell it but you can always get an appraiser to slap a value on it and tap your equity through a loan, this is real estate 101.
This is where you lose me and you need to go back to fundamentals....
"4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?"
In the case you have a 500k and the value drops 10% to 450k your equity position goes from 100k to 50k because you still owe the bank 400k, meaning if you were to sell you would only retain 50k. In the case where you didn't lever, if you lose 10% you only lose 10k and if you were to sell you would recoup 90k. Thus the point that leverage is a double edged sword.
Point is.... leverage is a trade off between risk and reward. For instance - if your 65 and approaching retirement and have 5 paid off homes, it may not make sense to lever them 4 or 5 to 1 and go purchase 5 more homes because you are increasing your risk. What if the prices go down? What if the tenants don't pay? This is very different than the person who is 25 and just starting their investment career where they have a longer time horizon to recover if things go south.
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
Numbers don't lie
I don't know what this comment is referencing but that is correct, which is exactly my point.
If you have a property that cash flows positive, the only cost to you is the cash that comes out of your pocket. If you pay 100% in cash for a 100k property, your cost is 100k. If you pay 20% DP on that same property, your cost is only 20k..and the rest is paid for by the tenant. The tenant is paying the interest and the loan balance.
If both REI start with the same 100k:
1 - the person buying at 100% (100k) buys 1 property worth 100k.
2 - the person buying at 20% DP can buy 5 properties...each = 100k so the total PV is 500k.
3 - if the CF from the 100k property is 10k because there is no debt, then it takes 10 years to start making a profit
4 - if the CF from the 20k property is 5k due to 5k in mortgage payments/yr, it takes 4 years to start making a profit...for each property
5 - so, the person paying 20k per property gets 5 properties, 25k in CF, 500k in PV, and they both have the same equity (100k) at the start.
6 - if all the properties appreciate the same, the person with the 5 properties gets 5 times the appreciation.
7 - the person with 5 properties can buy the 6th property after year one from the CF using the same strategy
8 - the person paying 100k has to wait 10 years to get their 2nd property.
9 - if the person buying properties at 20k a pop buys a new property with every 20k gained in CF, by year 10, the 100k buyer isn't even in the same stratosphere for CF, PV and equity.
Okay I'll go piece by piece -
"An investment isn't a cost..."? What? So you get into investments for free? Of course an investment has a cost to it. It's called the "cost of the investment".
More equity = more risk because the equity is what is at risk. Just ask any lender.
3 - Appreciation isn't profit until you can access it. It's profit in theory, but until it becomes real, it's just theory. I say this because you don't lose cash flow once you are paid it, but you can lose equity within the hour after you calculate it in. Besides, when you go to sell the property (access it), what happens if you can't sell it for the needed amount? Equity is a number that to realize it you depend on future events you have no control over. It's not profit until it's realized.
4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?
6 - See #4 above. Same answer.
8 - ...and by the time the persons refinances, the person that invested using leverage from the start has already been making their profits...exponentially.
9 - once again, see #4 above.
@Joe Villeneuve It's been a pleasure sparring with you but this will be the furthest I go down this rabbit hole. I suggest you read a basic book on accounting, investing, or both. Like the real fundamentals, nothing soft - maybe a textbook or take a course at your local community college. I promise you will learn something.
Anyways - A cost is an expense that runs through income. Some examples would be insurance on your property, or taxes, or a repair bill for a plumber. An investment takes cash and converts it into something that hopefully generates cash over time, such as a real estate purchase, a stock purchase, a buy into an LP, etc.
Of course, if you are only putting up 20k it is less risky than 100K. But apples to apples is a 100k investment into 500k of MV vs 100k investment unlevered.
Appreciation you haven't accessed is called an unrealized gain. Just because it isn't realized doesn't mean it isn't real. Of course you may not know exactly what it is worth until you sell it but you can always get an appraiser to slap a value on it and tap your equity through a loan, this is real estate 101.
This is where you lose me and you need to go back to fundamentals....
"4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?"
In the case you have a 500k and the value drops 10% to 450k your equity position goes from 100k to 50k because you still owe the bank 400k, meaning if you were to sell you would only retain 50k. In the case where you didn't lever, if you lose 10% you only lose 10k and if you were to sell you would recoup 90k. Thus the point that leverage is a double edged sword.
Point is.... leverage is a trade off between risk and reward. For instance - if your 65 and approaching retirement and have 5 paid off homes, it may not make sense to lever them 4 or 5 to 1 and go purchase 5 more homes because you are increasing your risk. What if the prices go down? What if the tenants don't pay? This is very different than the person who is 25 and just starting their investment career where they have a longer time horizon to recover if things go south.
Here's where you lose me...and many others. You are approaching REI from a Stock Market mentality. When you do, you lose out on most of the advantages that REI has to offer, that don't exist in the SM.
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
Numbers don't lie
I don't know what this comment is referencing but that is correct, which is exactly my point.
If you have a property that cash flows positive, the only cost to you is the cash that comes out of your pocket. If you pay 100% in cash for a 100k property, your cost is 100k. If you pay 20% DP on that same property, your cost is only 20k..and the rest is paid for by the tenant. The tenant is paying the interest and the loan balance.
If both REI start with the same 100k:
1 - the person buying at 100% (100k) buys 1 property worth 100k.
2 - the person buying at 20% DP can buy 5 properties...each = 100k so the total PV is 500k.
3 - if the CF from the 100k property is 10k because there is no debt, then it takes 10 years to start making a profit
4 - if the CF from the 20k property is 5k due to 5k in mortgage payments/yr, it takes 4 years to start making a profit...for each property
5 - so, the person paying 20k per property gets 5 properties, 25k in CF, 500k in PV, and they both have the same equity (100k) at the start.
6 - if all the properties appreciate the same, the person with the 5 properties gets 5 times the appreciation.
7 - the person with 5 properties can buy the 6th property after year one from the CF using the same strategy
8 - the person paying 100k has to wait 10 years to get their 2nd property.
9 - if the person buying properties at 20k a pop buys a new property with every 20k gained in CF, by year 10, the 100k buyer isn't even in the same stratosphere for CF, PV and equity.
Okay I'll go piece by piece -
"An investment isn't a cost..."? What? So you get into investments for free? Of course an investment has a cost to it. It's called the "cost of the investment".
More equity = more risk because the equity is what is at risk. Just ask any lender.
3 - Appreciation isn't profit until you can access it. It's profit in theory, but until it becomes real, it's just theory. I say this because you don't lose cash flow once you are paid it, but you can lose equity within the hour after you calculate it in. Besides, when you go to sell the property (access it), what happens if you can't sell it for the needed amount? Equity is a number that to realize it you depend on future events you have no control over. It's not profit until it's realized.
4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?
6 - See #4 above. Same answer.
8 - ...and by the time the persons refinances, the person that invested using leverage from the start has already been making their profits...exponentially.
9 - once again, see #4 above.
@Joe Villeneuve It's been a pleasure sparring with you but this will be the furthest I go down this rabbit hole. I suggest you read a basic book on accounting, investing, or both. Like the real fundamentals, nothing soft - maybe a textbook or take a course at your local community college. I promise you will learn something.
Anyways - A cost is an expense that runs through income. Some examples would be insurance on your property, or taxes, or a repair bill for a plumber. An investment takes cash and converts it into something that hopefully generates cash over time, such as a real estate purchase, a stock purchase, a buy into an LP, etc.
Of course, if you are only putting up 20k it is less risky than 100K. But apples to apples is a 100k investment into 500k of MV vs 100k investment unlevered.
Appreciation you haven't accessed is called an unrealized gain. Just because it isn't realized doesn't mean it isn't real. Of course you may not know exactly what it is worth until you sell it but you can always get an appraiser to slap a value on it and tap your equity through a loan, this is real estate 101.
This is where you lose me and you need to go back to fundamentals....
"4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?"
In the case you have a 500k and the value drops 10% to 450k your equity position goes from 100k to 50k because you still owe the bank 400k, meaning if you were to sell you would only retain 50k. In the case where you didn't lever, if you lose 10% you only lose 10k and if you were to sell you would recoup 90k. Thus the point that leverage is a double edged sword.
Point is.... leverage is a trade off between risk and reward. For instance - if your 65 and approaching retirement and have 5 paid off homes, it may not make sense to lever them 4 or 5 to 1 and go purchase 5 more homes because you are increasing your risk. What if the prices go down? What if the tenants don't pay? This is very different than the person who is 25 and just starting their investment career where they have a longer time horizon to recover if things go south.
Here's where you lose me...and many others. You are approaching REI from a Stock Market mentality. When you do, you lose out on most of the advantages that REI has to offer, that don't exist in the SM.
What I am talking about has nothing to do with stock market vs real estate market; I am talking about core principals of finance and investing. Those principals don't magically "disappear" in the world of real estate. If your deal criteria is limited to payback period and cash flow you are missing out on value add opportunities which are really powerful wealth building tools, probably the most powerful, in my opinion. Not to say you can't make a lot of money investing just based on those two criteria I am just saying to be aware of the leverage trade off that is driving your returns - which you clearly aren't.
@Matthew M. This is probably one of the most frustrating this about this site. People throw out terms that have gained traction through BP but there is not an underlying understanding of the concept, in this case cashflows. I would love to have in-depth discussions that move real estate forward but this site is stuck on 1%, monthly cashflow, and mythical cap rates. It is all pseudo- financial analysis. If @Joe Villeneuve doesn't understand what a cashflow is, how he educate others on it. All he can do is regurgitate "group think knowledge" and dogma.
I am shocked by the combination of arrogance and ignorance in your posts.
Your equity position drops 50% in the 1st case from 100k to 50k, in the second case it drops 10% from 100 to 90k. That is why I called you a genius, it was meant to be ironic.
Equity you buy isn't a gain. It's just a cash transfer from your bank account to the floorboards of the property. If you only buy 20% of your equity, and let the tenant buy the rest for you, the equity your tenant buys IS a gain...and it's free.
Joe, nobody is saying equity you buy is a gain if you pay retail for a property, but if you buy at a discount it is in fact a gain because it can be monetized. For instance, if you buy a 500k value house for 450k you gained 50k on the buy, hence the phrase - you make your money on the buy. That's regardless of if you put 10k down, 100k down, or the full 500k down. You can just sell the house or refinance to capture the equity you made on the buy. Not saying it is bad to lever, I do so myself. I'm just saying that it is silly to take the position that a deal is good based on the down payment required. How much you leverage is a personal decision but doesn't have much bearing on whether a deal is good or bad.
Numbers don't lie
I don't know what this comment is referencing but that is correct, which is exactly my point.
If you have a property that cash flows positive, the only cost to you is the cash that comes out of your pocket. If you pay 100% in cash for a 100k property, your cost is 100k. If you pay 20% DP on that same property, your cost is only 20k..and the rest is paid for by the tenant. The tenant is paying the interest and the loan balance.
If both REI start with the same 100k:
1 - the person buying at 100% (100k) buys 1 property worth 100k.
2 - the person buying at 20% DP can buy 5 properties...each = 100k so the total PV is 500k.
3 - if the CF from the 100k property is 10k because there is no debt, then it takes 10 years to start making a profit
4 - if the CF from the 20k property is 5k due to 5k in mortgage payments/yr, it takes 4 years to start making a profit...for each property
5 - so, the person paying 20k per property gets 5 properties, 25k in CF, 500k in PV, and they both have the same equity (100k) at the start.
6 - if all the properties appreciate the same, the person with the 5 properties gets 5 times the appreciation.
7 - the person with 5 properties can buy the 6th property after year one from the CF using the same strategy
8 - the person paying 100k has to wait 10 years to get their 2nd property.
9 - if the person buying properties at 20k a pop buys a new property with every 20k gained in CF, by year 10, the 100k buyer isn't even in the same stratosphere for CF, PV and equity.
Okay I'll go piece by piece -
"An investment isn't a cost..."? What? So you get into investments for free? Of course an investment has a cost to it. It's called the "cost of the investment".
More equity = more risk because the equity is what is at risk. Just ask any lender.
3 - Appreciation isn't profit until you can access it. It's profit in theory, but until it becomes real, it's just theory. I say this because you don't lose cash flow once you are paid it, but you can lose equity within the hour after you calculate it in. Besides, when you go to sell the property (access it), what happens if you can't sell it for the needed amount? Equity is a number that to realize it you depend on future events you have no control over. It's not profit until it's realized.
4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?
6 - See #4 above. Same answer.
8 - ...and by the time the persons refinances, the person that invested using leverage from the start has already been making their profits...exponentially.
9 - once again, see #4 above.
@Joe Villeneuve It's been a pleasure sparring with you but this will be the furthest I go down this rabbit hole. I suggest you read a basic book on accounting, investing, or both. Like the real fundamentals, nothing soft - maybe a textbook or take a course at your local community college. I promise you will learn something.
Anyways - A cost is an expense that runs through income. Some examples would be insurance on your property, or taxes, or a repair bill for a plumber. An investment takes cash and converts it into something that hopefully generates cash over time, such as a real estate purchase, a stock purchase, a buy into an LP, etc.
Of course, if you are only putting up 20k it is less risky than 100K. But apples to apples is a 100k investment into 500k of MV vs 100k investment unlevered.
Appreciation you haven't accessed is called an unrealized gain. Just because it isn't realized doesn't mean it isn't real. Of course you may not know exactly what it is worth until you sell it but you can always get an appraiser to slap a value on it and tap your equity through a loan, this is real estate 101.
This is where you lose me and you need to go back to fundamentals....
"4 - This is where percentages lie. If you have 500k in PV and lose 10% you retain 450k. If you have 100k in PV and lose 10%, you are left with 90k. Are you saying that if you invest 100k and end up with 90k in PV you are in better shape than if you invested that same 100k and ended up with only 480k?"
In the case you have a 500k and the value drops 10% to 450k your equity position goes from 100k to 50k because you still owe the bank 400k, meaning if you were to sell you would only retain 50k. In the case where you didn't lever, if you lose 10% you only lose 10k and if you were to sell you would recoup 90k. Thus the point that leverage is a double edged sword.
Point is.... leverage is a trade off between risk and reward. For instance - if your 65 and approaching retirement and have 5 paid off homes, it may not make sense to lever them 4 or 5 to 1 and go purchase 5 more homes because you are increasing your risk. What if the prices go down? What if the tenants don't pay? This is very different than the person who is 25 and just starting their investment career where they have a longer time horizon to recover if things go south.
Here's where you lose me...and many others. You are approaching REI from a Stock Market mentality. When you do, you lose out on most of the advantages that REI has to offer, that don't exist in the SM.
What I am talking about has nothing to do with stock market vs real estate market; I am talking about core principals of finance and investing. Those principals don't magically "disappear" in the world of real estate. If your deal criteria is limited to payback period and cash flow you are missing out on value add opportunities which are really powerful wealth building tools, probably the most powerful, in my opinion. Not to say you can't make a lot of money investing just based on those two criteria I am just saying to be aware of the leverage trade off that is driving your returns - which you clearly aren't.
Clearly you are not understanding what I'm saying. You appear to be so wrapped up in the "principles" that the specific applications REI has available. I'm not eliminating the basic principles of investing. The way I explain this is I live on the left side of the equal sign and not the right. The right side has the answer, but the left side has the equation, and it's the equation...and the rearranging the signs, variables, constants, etc...that offers the ability to take the same basic numbers and principles of investing and reassign where the appear on that left side of the equal sign. This rearranging in no way changes the answer (the right side).
You have no clue what I'm saying, what I teach, and what cash flow is. The last thing I do is "regurgitate group think knowledge".